Fewer banks at risk of fail­ure

Banks

Austin American-Statesman - - BUSINESS - Con­tin­ued from B MATT ROURKE / AS­SO­CI­ATED PRESS

In the July to Septem­ber quar­ter, the in­dus­try’s earn­ings reached $37.6 bil­lion, up from $35.3 bil­lion a year ear­lier. It was the best show­ing since the July-Septem­ber quar­ter of 2006, long be­fore the fi­nan­cial melt­down. By con­trast, at the depth of the Great Re­ces­sion in the last quar­ter of 2008, the in­dus­try lost $32 bil­lion.

Banks are lend­ing a bit more freely. The value of loans to con­sumers rose 3.2 per­cent in the 12 months that ended Sept. 30 com­pared with the pre­vi­ous 12 months, ac­cord­ing to data from the Fed­eral De­posit In­surance Corp. More lend­ing fu­els more con­sumer spend­ing, which drives about 70 per­cent of eco­nomic ac­tiv­ity. At the same time, over­all lend­ing re­mains well be­low lev­els con­sid­ered healthy over the long run.

Fewer banks are con­sid­ered at risk of fail­ure. In July through Septem­ber, the num­ber of banks on the FDIC’s con­fi­den­tial “prob­lem list” fell for a sixth straight quar­ter. Th­ese banks num­bered 694 as of Sept. 30 — about 9.6 per­cent of all fed­er­ally in­sured banks. At its peak in the first quar­ter of 2011, the num­ber of trou­bled banks was 888, or 11.7 per­cent of all fed­er­ally in­sured in­sti­tu­tions.

Bank fail­ures have de­clined. In 2009, 140 failed. In 2010, more banks failed — 157 — than in any year since the sav­ings and loan cri­sis of the early 1990s. In 2011, reg­u­la­tors closed 92. This year, the num­ber of fail­ures has trick­led to 51. That’s still more than nor­mal. In a strong econ­omy, an av­er­age of only four or five banks close an­nu­ally. But the sharply re­duced pace of clos­ings shows sus­tained im­prove­ment.

Less threat of loan losses. The money banks had to set aside for pos­si­ble losses fell 15 per­cent in the July-Septem­ber quar­ter from a year ear­lier. Loan port­fo­lios have strength­ened as more cus­tomers have re­paid on time. Losses have fallen for nine straight quar­ters. And the pro­por­tion of loans with pay­ments over­due by 90 days or more has dropped for 10 straight quar­ters.

“We are def­i­nitely on the back end of this cri­sis,” said Josh Siegel, chief ex­ec­u­tive of Stonecas­tle Part­ners, a firm that in­vests in banks.

The big­gest boost for banks is the grad­u­ally strength­en­ing econ­omy. Em­ploy­ers added nearly 1.7 mil­lion jobs in the first 11 months of 2012. More peo­ple em­ployed mean more peo­ple and busi­nesses can re­pay loans. And af­ter bet­ter-thanex­pected eco­nomic news last week, some an­a­lysts said the econ­omy could end up grow­ing faster in the Oc­to­ber to De­cem­ber quar­ter — and next year — than pre­vi­ously thought.

That as­sumes Congress and the White House can strike a bud­get deal to avert the “fis­cal cliff” — the steep tax in­creases and spend­ing cuts that are set to kick in Jan. 1. If they don’t reach a deal, those mea­sures would sig­nif­i­cantly weaken the econ­omy.

Banks have also been bol­stered by higher cap­i­tal, their cush­ion against risk. Banks boosted cap­i­tal 3.8 per­cent in the third quar­ter, FDIC data show. And the in­dus­try’s av­er­age ra­tio of cap­i­tal to as­sets reached a record high.

On the other hand, many banks are no longer ben­e­fit­ing from record­low in­ter­est rates. They still pay al­most noth­ing to de­pos­i­tors and on money bor­rowed from other banks or the government. But steadily lower rates on loans other than credit cards have re­duced how much banks earn.

“This in­ter­est-rate pres­sure on the banks be­comes very dif­fi­cult to over­come,” said Fred Can­non, chief eq­uity strate­gist and di­rec­tor of re­search at Keefe, Bruyette & Woods. “It’s a big head­wind for banks.”

Many banks have re­ported lower net in­ter­est mar­gin — the dif­fer­ence be­tween the in­come they re­ceive from loans and the in­ter­est they pay de­pos­i­tors and other lenders. It’s a key mea­sure of a bank’s prof­itabil­ity.

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